Aluminum giant Alcoa (NYSE:AA) has struggled against poor conditions in the market for lightweight metals lately, and even its proposed split into two separate companies hasn't led to any lasting bump in its stock price. But Alcoa shares got a nice boost Monday when activist investor Paul Singer and his Elliott Management hedge fund announced a 6.4% stake in the company. Elliott's comments sent Alcoa stock up more than 4%, but some long-term investors see even more potential for gains ahead based on the hedge fund's track record. Let's take a closer look at what Elliott Management said and what it could mean for Alcoa in the future.
What Elliott Management said
Alcoa's spinoff plan involves breaking itself into two parts. One of them will focus on the value-add components of Alcoa's current business, including custom-made components for the aerospace and automotive industries as well as rolled products. The other will focus on the upstream part of the aluminum business, including production of alumina and primary metals, in which Alcoa has made great strides to cut costs and boost profit margins even in a weak pricing environment.
In its regulatory filing announcing its position in Alcoa, Elliott Management gave several reasons for its decision. First, Elliott's managers said that the purchase was "based on their belief that such securities are dramatically undervalued by the public market." In addition, Elliott specifically supported the plans to break the company in two, saying that the fund "believe the spin-off transaction recently announced by management will create value substantially above the current share price."
Those comments would suggest that Elliott is satisfied with the way that Alcoa has handled itself. Yet the fund also noted that it plans to "seek to engage in a constructive dialogue with the Board of Directors of [Alcoa] and [Alcoa's] management regarding this transaction as well as a number of other additional available opportunities to maximize shareholder value." Indeed, Alcoa learned about the transaction several weeks ago, and an Alcoa representative said that the company has already started discussions with Elliott Management that it described as constructive.
Elliott's track record
Elliott Management has had plenty of opportunities to work with companies in the past. The hedge fund attacked oil company Hess (NYSE:HES) in 2013, leading Hess to announce dividend increases, a sizable stock repurchase program, and the sale of its gas-station network. The shares climbed impressively into 2014 before the plunge in oil prices forced it to retrench with extensive restructuring plans.
More recently, Elliott took a position in Boyd Gaming (NYSE:BYD), seeing an opportunity in the U.S. gaming market. As many investors focused on the fast growth of Macau, Boyd had suffered from exposure to Atlantic City and other struggling areas in the domestic gaming industry. Now, though, that move appears to have been prescient, as Boyd has bounced back in a stronger U.S. economy even as Asia's gaming capital has seen sales plunge. Boyd stock is up by more than half so far in 2015.
Investors' hopes for Alcoa are equally optimistic. The metal-maker's purchases of Firth Rixson, Tital, and RTI International have made it a player in the titanium market and allowed it to extend its reach to a wider range of aerospace-related applications. With faster growth from the industries it serves, investors hope that the value-add side will earn a higher multiple than the combined company has. Meanwhile, the upstream spinoff could highlight Alcoa's cost-cutting efforts more clearly to shareholders, and although the growth potential on that side of the business arguably isn't as large, the stock will be in a great position to benefit when aluminum prices turn around and start moving into the next upward phase of the commodity cycle.
As investors look forward to the completion of the spinoff in the second half of next year, Elliott Management's position represents a key vote of confidence in the company. Although conditions could remain tough for Alcoa in the interim, ideas from Elliott on how to boost shareholder value even further might well pay off for patient investors who've stuck with the aluminum giant so far.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.